Many hedge fund investors have been frustrated with the lack of returns this year following a banner year in 2009.

Even though there has been a lack of commitment by large institutions to get on the bandwagon, there has been a lack of excitement in most asset classes.

The return YTD through June is a lackluster +0.15%, according to the HFN Hedge Fund Aggregate Index. Many managers have not embraced the economic recovery, so what is an investor to do?

Search for other venues that will meet their risk/return criteria.

A new hybrid-type-of-deal that has started to become more prevalent is a hedge fund structure with a private equity approach to publicly traded small cap stocks. This structure gives investors and managers the greatest opportunity in generating private equity-like returns with as much liquidity as possible.

Structurally, an investment team sets up a hedge fund vehicle and takes in capital from multiple investors for only one investment, the specifically targeted company.

Investors can review the deal specifics and either option in or out, depending upon their view of the company, industry and risk/return parameters.

While it may take some time to unlock the value, the investment is liquid since it is a publicly-traded equity, and can be sold into the marketplace.

The investment approach is to find those extremely undervalued stocks and take an activist approach in unlocking that value in the marketplace. This can involve taking board seats, hiring/firing management personnel and thinking strategically about expansion, partnerships and potential acquirers.

The investment teams are typically seeking to generate 2x to 4x returns in 18 to 24 months. This seems to resonate with investors as the due diligence is worth the effort and the time period of illiquidity of the investment is offset by the above average return. (Although the underlying is liquid.)

This is an interesting combination of private equity and a hedge fund structure to accommodate everyone. The fee structure (typically 2% and 20%) allows the manager to receive compensation for generating those returns in a concentrated portfolio (single stock) with the full disclosure to all investors, as opposed to a fund, which would involve multiple investments. While a fund of these investments would not necessarily be a bad thing, a one deal/one fund structure avoids many issues and can be evaluated more easily.

The blending of private equity-type returns with a more liquid hedge fund structure is a significant leap forward for those investors who are able to allocate some portion of their capital pool to these investments. While nothing is certain in the investment world, this approach does allow for a high annualized risk adjusted return with full disclosure. Not a bad approach for getting around anemic current returns.

The views expressed in this column do not necessarily reflect the views of HedgeFund.net.